Overvaluation threatens N14tr FG bond market

Babajide Komolafe

The N14 trillion markets in Federal Government bonds is on the course to imminent collapse as prices soar far above the real value of the bonds in a manner similar to the situation that preceded and precipitated the crash of the stock exchange.

Experts who spoke at a workshop in Lagos on promoting investment in FG bonds noted that the current market price of bonds which hovers around N180 is far above the real value of the bonds and does not reflect the underlying fundamentals.

Guest Speaker at the workshop and President Financial Datanet House Limited, Mr. Bola Onadele said   “It is looking like the bond market is getting overvalued at this point in time and we need to be careful. Bonds trading at N189! We are beginning to have goose pimples.”

“Is that a realistic price? How did that price eminent? What is the price formation? The essence is that the market may not be liquid enough on those bonds. So if I buy from you and you don’t have it, you scramble around and buy back from someone. We need to have benchmark for the few bond trading to have  our yield curve and we need to make sure those benchmarks are sizeable.

So if you have a N300 billion issue, that is huge and it is going to be difficult for one bank, pension fund hold that paper and few people are trading. Once you have sizable benchmark on the two year, three year, 10 year and then 20 year then we can see a reasonable yield curve. At the moment I don’t believe that N189 price shows the real price of that bond.”

Corroborating Onadele, Chairman, Bond Dealers Work Group, Mr. Samuel Ocheho  said, “In terms of the market been overvalued, he (Onadele)  was looking at the  yield curve , he feels that some of the  prices are expensive right now and some of the yield are below inflation rate which is not a good sign in terms of real investment, he feels it is real time negative investment in terms of the rate.

And what he is saying is that we need to look at the fundamentals and determine where the yield should be. If you hold a lot of potfolio right now, it is not the best time to hold a lot, you should start exiting the bonds now to take advantage of the low yield so that in event the inflation rate ever goes up let’s say for instance 20 to 30 per cent, a 20 year bond at 8.0 per cent will be a crash in the market. So he is looking at the fundamentals”

The overvaluation of bonds is attributed to upsurge in demand as investors shift focus to the bond market after the collapse of the stock market. This caused the number and value of transactions in the federal government bonds to rise by 20 per cent and 40 per cent respectively.

In his keynote address, Director_General Debt Management Office, Dr. Abraham Nwankwo, the  said that the number of transactions in FG bond rose to 107.8 trillion in the first ten months of 2009 from N80 trillion 2008 while the value rose to N14.6 trillion from N10.09 trillion.

He noted that domestic bond market has evolved rapidly in the last six years and If the sovereign bond market had not been resuscitated in 2003 and sufficiently developed as at 2008, in the face of the global financial and economic crisis as well as the crisis in the Nigerian equities market, the down_spin in our stock market could have hit a deeper bottom; the quake and dislocation in the financial system could have been more traumatic; and, the deceleration of economic activities could have been more intense. With the benefit of hindsight, thanks to our collective foresight, that gloomier scenario was averted.”

There are, however, challenges such as: the provision of an electronic bond auction and trading system, disparate tax treatment for bonds, the introduction of new products to deepen the market and the constraints imposed by the Land Use Act. Even then, the prospects are quite upbeat because these issues are being addressed through the Bond Market Steering Committee and where necessary, by stakeholders in their individual capacities. With our collective resolve and efforts, these issues would be resolved in no distant future.”